My Discussion- The Quality of Financial Information
Referencing this week’s readings and lecture, describe the quality issues related to reporting revenue. What is the importance of understanding various inventory valuation methods in determining the quality of reported profits?
Respond to at least three of your classmates’ posts.
This week readings and lectures are as follows please use to reference in discussion and replys to fellow students:
Required Resources
Text
Epstein, L. (2014). Financial decision making: An introduction to financial reports [Electronic version]. Retrieved from https://content.ashford.edu/
- Chapter 5: Evaluating the Quality of Financial Reports
Recommended Resources
Articles
Miller, P. B. W. (2002, April). Quality financial reporting: Finding customer focus through the power of competition (Links to an external site.)Links to an external site.. Journal of Accountancy. Retrieved from http://www.journalofaccountancy.com/Issues/2002/Apr/QualityFinancialReporting.htm
Turner, L. E. (2000, March 23). Speech by SEC staff: Charting a course for high quality financial reporting (Links to an external site.)Links to an external site.. U.S. Securities and Exchange Commission. Retrieved from http://www.sec.gov/news/speech/spch356.htm
EDWARDS DISCUSSION:
Relevance is one qualitive characteristic that is used when companies report revenue which involves reporting financial stats that can inform shareholders about future expectations. A company that has 3 million in debt while only clearing a net income of 4 million is relevant information to shareholders, which will likely prevent them from investing. If not for this type of quality reporting, companies would be able to mislead the public. A company that has equivalent debt to their income may try to mislead the public by noting a non-relevant figure such as discussing a dollar increase in their earnings per share.
“Faithful representation means that the information presented is complete, neutral, and free from material error. Information is considered complete if it includes all details necessary to make an informed decision. A report is considered neutral if there is no bias” (Epstein, 2014, p. 5.2). A company can be unfaithful in their representation by exaggerating on their low income, which could can lead to less tax liability.
It is vital to understand various inventory valuation methods in determining quality of reported profits because it affects the cost of goods, gross profit and net income. This means incorrect inventory will also have incorrect stats on current assets, capital and equity.
References
Epstein, L. (2014). Financial decision making: An introduction to financial reports. Retrieved from https://content.ashford.edu/books/AUOMM622.14.1/sections/sec1.3?search=equity#w10704 (Links to an external site.)
REMMIES DISCUSSION:
THE QUALITY OF FINANCIAL INFORMATION
Referencing this week’s readings and lecture, describe the quality issues related to reporting revenue. What is the importance of understanding various inventory valuation methods in determining the quality of reported profits?
According to this week lecture “the usefulness of financial reports to readers depends on report quality. The conceptual framework for financial reporting categorizes qualitative characteristics of financial reports into two broad categories: fundamental qualitative characteristics, which include relevance and faithful representation, and enhancing qualitative characteristics, which make financial reports more useful and include comparability, timeliness, verifiability, and understandability.” (Week 5 Lecture)
The U. S. generally accepted accounting principles (GAAP) and the International Financial Reporting Standards (IFRS) viewed the value of inventory differently; companies filing reports under IFRS must use FIFO (first in, first out) or the “weighted-average inventory valuation methods” and those filling under U. S. GAAP rules uses the LIFO (last in, first out). (Epstein, L 2014)
The way FIFO values inventory as the first item in the business is the first item sold whilst the LIFO system the last item in will be the first item sold. In this scenario the most expensive item will likely be sold, and the older, cheaper items will remained on the self. When using the LIFO method this can increase the cost of items sold and decrease net income, making a representation of the company making less money, thus reducing the company’s income taxes when prices are rising. FIFO method results in a lower cost of items sold and higher net income when prices are rising. In which the opposite is true when prices are decreasing. (Epstein, L 2014)
It is important to understand that the two systems are total different therefore you can’t make comparison between them, thus determining the real cost of doing business can be difficult if not impossible. Using one method would alleviate this setback. (Epstein, L 2014)
Epstein, L. (2014). Financial decision making: An introduction to financial reports [Electronic version]. Retrieved from https://content.ashford.edu/
QUENTINS DISCUSSION:
Valuation is the process by which managers assess how much worth something has. “The conceptual framework for financial reporting categorizes qualitative characteristics of financial reports into two broad categories: fundamental qualitative characteristics, which include relevance and faithful representation, and enhancing qualitative characteristics, which make financial reports more useful and include comparability, timeliness, verifiability, and understandability” (Week 5 Lecture). There are two ways assets are valued which are through IFRS International Financial Reporting Standards) and GAAP (generally accepted accounting principals). IFRP allows companies to revaluate property, plant, and equipment, whereas GAAP does not allow revaluations, with the exception of some financial means, like marketable securities (Epstein, 2014).
Companies that report under IFRP must abide by the FIFO. The belief is that the first item in is the first item out. GAAP must abide by the LIFO, last in, first out. Net profit can be influenced in both ways, however using the LIFO, the profit can decrease because the cost of goods sold increases. On the flip side, profit can increase if the COGS was lower (2014). It important to understand these methods to understand how revenue will be affected overall and to see how much each line item is and how it affects the bottom line.
Cain, M. (2018). Week 5 Lecture. Retrieved from https://ashford.instructure.com/courses/21789/pages/week-5-weekly-lecture?module_item_id=1104034
